Stocks, Mutual Funds, and Your Financial Goals
First Published Date : January 22, 2009 ADawnJournal.com
In my book Invest Now I mentioned that mutual funds are a less risky investment product than stocks and really suit those who are looking to keep risks at a minimum. I always come across financial gurus and regular investors complaining about the cost of mutual funds. However, they always fail to mention that stock investors may lose all their money if they pick the wrong stocks, but mutual fund investors are very unlikely to lose everything even if they pick the wrong mutual funds.
Just look at what happened to recently bankrupt Nortel. At the peak of the tech bubble, this superhero was trading at $1,231. And now its stocks are worthless. Let’s say you put in $100,000 in Nortel stock a week ago, or a year ago. How much is your $100,000 worth now? Nothing. How about the same $100,000 invested in a mutual fund a week or a year ago? It’s hard to say how much it would have been worth now (based on what you bought); but you can say in confidence that you would not have lost all your money—although you may have paid $2000 fees. Which one do you think is better? Paying a few thousand dollars in fees and keeping your money, or losing all your money without paying any fees?
The problem with stock is that it is extremely hard to pick winning individual stocks. On the other hand, mutual funds are designed for average investors; as a result, it’s not that hard to pick a mutual fund with a moderate rate of return. However, you need to be careful so you don’t end up paying hefty fees. In Invest Now, I discussed how you can invest in mutual funds without paying lots of fees. Also, I emphasized low-cost index funds. Index funds are not actively managed funds: no portfolio managers run the fund. Index funds mirror the market performance of an index by buying stocks or other instruments that match the underlying index’s composition.
In order to be a successful investor and realise your financial goals, you need to avoid unnecessary risks and paying sky-rocketed fees. Mutual funds, especially index funds, can offer all these with minimal effort and time. Even when everything goes wrong, it is unlikely that you will lose all your money with mutual funds. However, such is not the case with stocks. Just ask investors across the globe that were holding Nortel in their portfolio; they will be glad to tell you, had they known it before, they would have held mutual funds. Even the riskiest fund on earth with the highest fees would not have wiped out all their money in one day like Nortel did.